Hi All,
Can someone explain the difference between untrended ROC and trended ROC? My initial assumption was that Untrended Return on Cost = not stabilized (uses current rents; doesn't incorporate growth in rent) and Trended Return on Cost = stabilized return on cost (incorporates rent growth).
Is this accurate? Or am I missing something? I feel like I have seen instances where people refer to untrended stabilized ROC which makes me think I am not fully understanding.
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This is correct. Some people also will trend OpEx as well but not all people.
I can't imagine anyone gets away with trending rents but not expenses. You've got to have a pretty naive lender/investor to pull that off.
Sorry I was being a little sloppy. I've seen some people trend expenses but not rents (ie use untrended rents and stabilized expenses).
Your assessment of untrended vs trended ROC is correct. In my experience, banks typically look at untrended yields as a conservative approach to sizing a construction or rehab loan. If rent growth stays stagnant, assuring the deal still works with untrended rents is important especially at this stage in the cycle.
Everyone used to look for a 100+ bps spread on today’s rent (untrended) with a conservative cap rate so really it was like 150+. Now everything is expensive and 100 (read 150) is really more like 50-75 so people started trending (inflating) rent so that it still gets to 100 bps on today’s actual (not at all conservative) cap rates. Sign of the times.
trended means you are assuming percentage growth on rent and expenses. Untrended means no growth.
In a development deal with a long predevelopment period / development timeline sometimes you'll trend construction costs too. So untrended ROC is todays rents at today's costs, and trended yield as of CO would include construction cost, opex, and rent escalation.
This is the best answer to the original question.
Curious what those of you out there (at equity shops) are utilizing for RETs in untrended and trended ROCs for purposes of gauging ROC- exit cap spreads. Are you assuming reassessed taxes (by applying assessment ratios and mill rates to a valuation derived from each respective NOI, incorporating reassessed RETs)?
I do. I look at reassessed taxes based on however there are calculated wherever you are reviewing the project (i.e. % of HC + land basis etc.) for static stabilized analysis. And then trend that number for CF projections to get to trended ROC. For places like CA, I also adjust the taxes on sale rather than just capping CF.
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